AND CONSOLIDATED SUBSIDIARIES Consolidated Financial Statements For the Years Ended December 2016
Consolidated Balance Sheets Current assets: Millions of yen Thousands of U.S. dollars (Note 1) Assets 2016 2015 2016 Cash and time deposits (Notes 12, 16 and 17) 12,642 10,017 $ 125,027 Trade receivables (Note 12) 10,595 11,652 104,779 Allowance for doubtful receivables (163) (164) (1,613) Net trade receivables 10,432 11,488 103,165 Inventories (Note 4) 5,893 6,352 58,281 Deferred tax assets (Note 7) 486 460 4,808 Other current assets (Notes 11 and 12) 707 2,181 7,000 Total current assets 30,162 30,500 298,284 Property, plant and equipment: Land (Note 17) 4,296 4,555 42,485 Buildings and structures 15,501 17,325 153,297 Machinery and equipment 10,775 11,914 106,563 Construction in progress 64 50 639 30,637 33,846 302,985 Accumulated depreciation (15,109) (16,365) (149,421) Net property, plant and equipment 15,528 17,480 153,564 Investments and other assets: Investments in securities (Notes 11 and 12) 1,094 1,188 10,819 Goodwill 153 206 1,513 Deferred tax assets (Note 7) 515 639 5,097 Other assets 427 698 4,222 Total investments and other assets 2,189 2,733 21,652 Total assets 47,880 50,714 $ 473,501 See accompanying Notes to Consolidated Financial Statements. 1
Consolidated Balance Sheets (Continued) Current liabilities: Millions of yen Thousands of U.S. dollars (Note 1) Liabilities and Net Assets 2016 2015 2016 Current portion of long-term debt (Notes 5, 12 and 17) 987 1,724 $ 9,769 Trade payables (Note 12) 4,202 4,974 41,558 Accrued expenses 3,087 3,208 30,533 Accrued income taxes 551 278 5,454 Deferred tax liabilities (Note 7) 28 100 286 Advances from customers 3,224 2,561 31,883 Other current liabilities 1,111 1,309 10,992 Total current liabilities 13,193 14,158 130,478 Noncurrent liabilities: Long-term debt (Notes 5, 12 and 17) 1,902 1,802 18,813 Net defined benefit liability (Note 6) 3,928 4,222 38,850 Deferred tax liabilities (Note 7) - 37 - Other liabilities 165 170 1,633 Total noncurrent liabilities 5,996 6,233 59,297 Contingent liabilities (Note 18) Total liabilities 19,190 20,391 $ 189,775 See accompanying Notes to Consolidated Financial Statements. 2
Consolidated Balance Sheets (Continued) Net assets (Note 8): Millions of yen Thousands of U.S. dollars (Note 1) 2016 2015 2016 Shareholders' equity Common stock: Authorized 99,347,000 shares Issued 43,076,347 shares at September 30, 2016 43,076,347 shares at September 30, 2015 14,496 14,496 $ 143,357 Capital surplus 5,148 5,148 50,913 Retained earnings 16,674 14,771 164,896 Treasury stock: 1,221,635 shares at September 30, 2016 1,211,304 shares at September 30, 2015 (918) (913) (9,087) Total shareholders' equity 35,400 33,503 350,079 Accumulated other comprehensive income: Net unrealized gains (losses) on available-for-sale securities (97) 164 (963) Unrealized gains (losses) on hedging derivatives 9 (19) 89 Foreign currency translation adjustments (6,133) (2,820) (60,656) Remeasurements of defined benefit plans (576) (574) (5,698) Total accumulated other comprehensive income (6,798) (3,249) (67,229) Subscription rights to shares (Note 14) 88 69 876 Total net assets 28,690 30,323 283,726 Total liabilities and net assets 47,880 50,714 $ 473,501 See accompanying Notes to Consolidated Financial Statements. 3
Consolidated Statements of Income Years ended Millions of yen Thousands of U.S. dollars (Note 1) 2016 2015 2016 Net sales 44,664 47,342 $ 441,698 Cost of sales 28,736 31,038 284,181 Gross profit 15,928 16,304 157,517 Selling, general and administrative expenses (Note 9) 12,270 13,854 121,345 Operating profit 3,657 2,450 36,172 Other income (expenses): Interest and dividend income 47 51 474 Interest expense (28) (40) (282) Equity in earnings of an affiliate 52 59 517 Net gains (losses) on disposal of property, plant and equipment 64 (2) 635 Net foreign exchange gains (losses) (41) 115 (405) Gain on sales of shares of subsidiaries - 604 - Previous year's over-accrual for litigation expenses 31-306 Impairment loss on fixed assets (Note 10) - (260) - Loss on valuation of derivatives (27) - (273) Commemorative function cost (68) - (675) Other, net 26 (0) 258 56 528 556 Income before income taxes 3,714 2,978 36,728 Income taxes (Note 7): Current 1,151 1,004 11,390 Deferred 31 (550) 313 1,183 454 11,703 Net income 2,530 2,524 25,025 Net income attributable to owners of the parent 2,530 2,524 $ 25,025 Yen U.S. dollars (Note 1) 2016 2015 2016 Net income per share of common stock: Basic 60.45 60.30 $ 0.59 Diluted 60.23 60.13 0.59 Number of shares 2016 2015 Average number of shares of common stock outstanding (thousands) 41,860 41,864 Average number of shares of diluted common stock outstanding (thousands) 42,013 41,984 See accompanying Notes to Consolidated Financial Statements. 4
Consolidated Statements of Comprehensive Income Years ended Millions of yen Thousands of U.S. dollars (Note 1) 2016 2015 2016 Income before minority interests 2,530 2,524 $ 25,025 Other comprehensive income: Net unrealized gains (losses) on available-for-sale securities (261) 99 (2,589) Unrealized gains (losses) on hedging derivatives, net of taxes 28 14 282 Foreign currency translation adjustments (3,313) (530) (32,768) Remeasurements of defined benefit plans, net of tax (1) 409 (18) Total other comprehensive income (Note 15) (3,548) (8) (35,093) Comprehensive income (1,018) 2,516 $ (10,068) Comprehensive income attributable to: Owners of the parent (1,018) 2,516 $ (10,068) Minority interests - - - See accompanying Notes to Consolidated Financial Statements. 5
Consolidated Statements of Changes in Net Assets Years ended FY2016 (million yen) Common stock Capital surplus Shareholders' equity Retained earnings Treasury stock Total shareholders' equity Balance at beginning of the year 14,496 5,148 14,771 (913) 33,503 Cumulative effects of changes in accounting policies Restated balance 14,496 5,148 14,771 (913) 33,503 Changes of items during period Cash dividends (627) (627) Net income for the year 2,530 2,530 Purchase of treasury stock (5) (5) Disposal of treasury stock Others Total changes of items during period - - 1,902 (5) 1,896 Balance at end of the year 14,496 5,148 16,674 (918) 35,400 - - Net unrealized gains (losses) on available for sale securities Accumulated other comprehensive income Unrealized gains (losses) on hedging derivatives Foreign currency translation adjustments Remeasurements of defined benefit plans Total accumulated other comprehensive income Subscription rights to shares Total net assets Balance at beginning of the year 164 (19) (2,820) (574) (3,249) 69 30,323 Cumulative effects of changes in accounting policies Restated balance 164 (19) (2,820) (574) (3,249) 69 30,323 Changes of items during period Cash dividends (627) Net income for the year 2,530 Purchase of treasury stock (5) Disposal of treasury stock Others (261) 28 (3,313) (1) (3,548) 18 (3,529) Total changes of items during period (261) 28 (3,313) (1) (3,548) 18 (1,633) Balance at end of the year (97) 9 (6,133) (576) (6,798) 88 28,690 - - See accompanying Notes to Consolidated Financial Statements. 6
Consolidated Statements of Changes in Net Assets (Continued) Years ended FY2015 (million yen) Common stock Capital surplus Shareholders' equity Retained earnings Treasury stock Total shareholders' equity Balance at beginning of the year 14,496 5,204 12,964 (1,293) 31,372 Cumulative effects of changes in accounting policies (93) (93) Restated balance 14,496 5,204 12,871 (1,293) 31,279 Changes of items during period Cash dividends (624) (624) Net income for the year 2,524 2,524 Purchase of treasury stock (3) (3) Disposal of treasury stock (56) 384 327 Others Total changes of items during period - (56) 1,900 380 2,223 Balance at end of the year 14,496 5,148 14,771 (913) 33,503 Net unrealized gains (losses) on available for sale securities Accumulated other comprehensive income Unrealized gains (losses) on hedging derivatives Foreign currency translation adjustments Remeasurements of defined benefit plans Total accumulated other comprehensive income Subscription rights to shares Total net assets Balance at beginning of the year 65 (33) (2,289) (983) (3,241) 62 28,193 Cumulative effects of changes in accounting policies Restated balance 65 (33) (2,289) (983) (3,241) 62 28,100 Changes of items during period Cash dividends (624) Net income for the year 2,524 Purchase of treasury stock (3) Disposal of treasury stock 327 Others 99 14 (530) 409 (8) 7 (0) Total changes of items during period 99 14 (530) 409 (8) 7 2,222 Balance at end of the year 164 (19) (2,820) (574) (3,249) 69 30,323 (93) See accompanying Notes to Consolidated Financial Statements. 7
Consolidated Statements of Changes in Net Assets (Continued) Years ended FY2016 (Thousand of U.S. dollars) Common stock Capital surplus Shareholders' equity Retained earnings Treasury stock Total shareholders' equity Balance at beginning of the year $ 143,357 $ 50,913 $ 146,081 $ (9,029) $ 331,321 Cumulative effects of changes in accounting policies Restated balance 143,357 50,913 146,081 (9,029) 331,321 Changes of items during period Cash dividends (6,209) (6,209) Net income for the year 25,025 25,025 Purchase of treasury stock (57) (57) Disposal of treasury stock Others Total changes of items during period - - 18,815 (57) 18,757 Balance at end of the year $ 143,357 $ 50,913 $ 164,896 $ (9,087) $ 350,079 - - Net unrealized gains (losses) on availablefor-sale securities Accumulated other comprehensive income Unrealized gains (losses) on hedging derivatives Foreign currency translation adjustments Remeasurements of defined benefit plans Total accumulated other comprehensive income Subscription rights to shares Total net assets Balance at beginning of the year $ 1,626 $ (193) $ (27,888) $ (5,680) $ (32,135) $ 690 $ 299,876 Cumulative effects of changes in accounting policies Restated balance 1,626 (193) (27,888) (5,680) (32,135) 690 299,876 Changes of items during period Cash dividends (6,209) Net income for the year 25,025 Purchase of treasury stock (57) Disposal of treasury stock Others (2,589) 282 (32,768) (18) (35,093) 186 (34,907) Total changes of items during period (2,589) 282 (32,768) (18) (35,093) 186 (16,149) Balance at end of the year $ (963) $ 89 $ (60,656) $ (5,698) $ (67,229) $ 876 $ 283,726 - - See accompanying Notes to Consolidated Financial Statements. 8
Consolidated Statements of Cash Flows Years ended Millions of yen Thousands of U.S. dollars (Note 1) 2016 2015 2016 Cash flows from operating activities: Income before income taxes Adjustments to reconcile income before income taxes to net cash 3,714 2,978 $ 36,728 provided by operating activities: Depreciation and amortization 983 1,127 9,727 Amortization of goodwill 48 48 478 Interest and dividend income (47) (51) (474) Interest expenses 28 40 282 Equity in earnings of an affiliate (52) (59) (517) Net (gains) losses on disposal of property, plant and equipment (64) 2 (635) Gain on sales of shares of subsidiaries (Note 16) - (604) - Impairment loss on fixed assets - 260 - (Increase) decrease in net trade receivables (278) 781 (2,751) (Increase) decrease in inventories (399) (206) (3,952) Increase (decrease) in trade payables (395) (982) (3,908) Increase (decrease) in accrued expenses 326 126 3,230 Increase (decrease) in advances from customers 1,182 206 11,691 Increase (decrease) in net defined benefit liability (22) 74 (219) Other, net 249 (298) 2,467 Subtotal 5,273 3,442 52,149 Interest and dividends received 49 155 491 Interest paid (28) (40) (282) Income taxes paid (1,085) (1,065) (10,737) Net cash provided by operating activities 4,208 2,492 41,621 Cash flows from investing activities: Purchases of securities (177) (50) (1,754) Proceeds from redemption of securities 120 100 1,190 Purchases of property, plant and equipment (616) (1,524) (6,099) Proceeds from sale of property, plant and equipment 145 6 1,435 Purchases of intangible assets (47) (152) (473) Proceeds from sales of shares of subsidiaries resulting in change in scope of consolidation (Note 16) 422 370 4,181 Collection of short-term loans receivable 879-8,693 Others, net (66) 16 (653) Net cash used in investing activities 659 (1,233) $ 6,519 See accompanying Notes to Consolidated Financial Statements. 9
Consolidated Statements of Cash Flows (Continued) Years ended Cash flows from financing activities: Millions of yen Thousands of U.S. dollars (Note 1) 2016 2015 2016 Increase (decrease) in short-term borrowings - (149) $ - Proceeds from long-term debt 1,400 205 13,844 Repayment of long-term debt (1,924) (701) (19,035) Dividends paid (627) (624) (6,209) Others, net (5) (3) (57) Net cash used in financing activities (1,158) (1,273) (11,458) Effect of exchange rate changes on cash and cash equivalents (1,156) 127 (11,433) Net increase (decrease) in cash and cash equivalents 2,553 112 25,248 Cash and cash equivalents at beginning of year 10,007 9,894 98,965 Cash and cash equivalents at end of year (Note 16) 12,560 10,007 $ 124,213 See accompanying Notes to Consolidated Financial Statements. 10
(1) Basis of Presenting Consolidated Financial Statements HOSOKAWA MICRON CORPORATION ( the Company ) and its domestic consolidated subsidiary maintain their accounting records in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Law and its related accounting regulations and in conformity with accounting principles generally accepted in Japan ( Japanese GAAP ), which are different in certain respects as to the application and disclosure requirements from International Financial Reporting Standards ( IFRS ). The Company and its consolidated foreign subsidiaries adopted Practical Issues Task Force ( PITF ) No. 18, Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements, issued by the Accounting Standards Board of Japan ( ASBJ ). Accordingly, in consolidation, any necessary adjustments were made to the accounts of the consolidated foreign subsidiaries to reconcile the accounting principles of the respective countries of domicile to either IFRS or the United States generally accepted accounting principles ( U.S. GAAP ), and any adjustments from IFRS or U.S. GAAP to Japanese GAAP were made for the four items specified in PITF No. 18. The accompanying consolidated financial statements have been compiled and translated into English from the consolidated financial statements of the Company prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Financial Instruments and Exchange Law. Certain supplemental information included in the Japanese version of the statutory consolidated financial statements, but not required for fair presentation, has not been presented in this version of consolidated financial statements. The accompanying financial statements are presented in the way that fractions less than one million yen are rounded down. This treatment of fractions has been changed from the previous method of rounding off to the nearest million and applies to the financial statements of 2016 and 2015. The translation of Japanese yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan, using the prevailing exchange rate at September 30, 2016, which was 101.12 to U.S. $1.00. This translation should not be construed as a representation that the Japanese yen amounts have been, could have been or could in the future be converted into U.S. dollars at this or any other rate of exchange. (2) Significant Accounting Policies (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries effectively controlled by the Company. All significant intercompany balances and transactions are eliminated upon consolidation. An investment in an affiliate is accounted for using the equity method. (b) Cash and Cash Equivalents (Note 16) For the purpose of the consolidated statements of cash flows, cash and cash equivalents consists of cash on hand, call deposits held with banks and all highly liquid investments with a maturity of three months or less. 11
(c) Securities and Investments in Securities (Note 11) Securities and investments in securities are classified and accounted for, depending on management s intention, as available-for-sale securities. Marketable available-for-sale securities are reported at fair value with unrealized gains and losses, net of tax, as a separate component of net assets. Nonmarketable available-for-sale securities are stated at cost, determined by the moving average method. (d) Allowance for Doubtful Receivables Allowance for doubtful receivables of the Company and its domestic subsidiary is based on the actual ratio of bad debts in the past and the estimated uncollectible amounts of certain individual receivables. The foreign subsidiaries accounts for the estimated uncollectible amounts based on an analysis of certain individual receivables. (e) Inventories (Note 4) Finished goods and work in process are stated at cost, principally by the specific identification method (the amount on the balance sheet is calculated by writing down the carrying value based on lower profitability). Raw materials are stated at cost, principally determined by the moving average method (the amount on the balance sheet is calculated by writing down the carrying value based on lower profitability). Supplies of the Company and its domestic subsidiary are valued at the latest purchase price. Supplies of the foreign subsidiaries are stated at the lower of cost or market. (f) Revenue Recognition for Construction Contract Certain foreign subsidiaries apply the percentage of completion method to construction contracts in cases in which the outcome of the construction contracts can be reliably estimated. The percentage of completion is estimated by using the cost comparison method. The other construction contracts for which the outcome cannot be reliably estimated are recognized by the completed contract method. (g) Property, Plant and Equipment Property, plant and equipment are stated at cost. Property, plant and equipment at the Tsukuba factory, Nara plant and Gojo plant of the Company and buildings (excluding facilities attached to buildings) which were acquired on or after April 1, 1998 and facilities attached to buildings and structures which were acquired on or after April 1, 2016 are depreciated using the straight-line method over the respective estimated useful life. Other property, plant and equipment of the Company are depreciated using the declining balance method over the estimated useful life. The subsidiaries compute depreciation primarily using the straight-line method. For leased assets, the Company and the domestic subsidiary apply the straight-line method, with a residual value of zero and the lease term as the estimated useful life. 12
The principal estimated useful life for buildings and structures is 2 to 50 years. For machinery and equipment, the estimated useful life ranges from 2 to 17 years. (h) Goodwill and Other Intangible Assets Goodwill represents the excess of total acquisition cost over the fair market value of the net assets acquired. Goodwill resulting from the acquisition of consolidated subsidiaries is amortized by the straight-line method over a reasonable term (within 20 years). Purchased intangible assets other than goodwill are amortized over their respective estimated useful life, unless an asset s life is determined to be indefinite. (i) Computer Software Expenditures for computer software developed for internal use are generally charged to income when incurred. However, if it contributes to the generation of income or to future cost savings, the expenditure is capitalized and amortized using the straight-line method over its estimated useful life, which is usually 5 years. (j) Product Warranty The Company and the subsidiaries provide for the estimated cost to repair or replace products sold under warranties. (k) Retirement Benefits (Note 6) i) Method of attributing expected benefits to periods of service When calculating retirement benefit obligations, a benefit formula basis is used for attributing expected retirement benefits to periods of service. ii) Method for calculating expenses for actuarial gains and losses and past service cost Actuarial gains and losses are amortized on a straight-line basis over certain periods within the average remaining service years of employees (6 to 17 years) from the year following the year in which they arise. Past service cost is amortized on a straight-line basis over certain periods within the average remaining service years of employees (13 years) from the year in which it arises. (l) Appropriations of Retained Earnings Appropriations of retained earnings are reflected in the financial statements in the period subsequent to the shareholders approval. 13
(m) Income Taxes (Note 7) Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and foreign tax credits carried forward. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. (n) Foreign Currency Translation The Company and its domestic subsidiary have adopted the Financial Accounting Standard for Foreign Currency Transactions issued by the Business Accounting Deliberation Council. In accordance with this standard, all monetary assets and liabilities denominated in foreign currencies are translated into Japanese yen at the rates of exchange prevailing at the balance sheet date. Financial statements of foreign subsidiaries denominated in foreign currency are translated into Japanese yen at year-end rates for all assets and liabilities and at average rates for income and expense accounts. Adjustments resulting from the translation of financial statements are reflected in foreign currency translation adjustments in net assets. (o) Derivatives and Hedging Activities (Note 13) The Company has adopted the Financial Accounting Standard on Accounting for Financial Instruments issued by the Business Accounting Deliberation Council as it is related to hedging and derivatives. The Company uses derivative financial instruments to hedge its exposure to fluctuation in foreign currency monetary assets and liabilities, foreign currency debt and interest on debt. Derivative instruments are stated at fair value and accounted for using deferred hedge accounting. Recognition of gains and losses resulting from changes in the fair value of derivative financial instruments are deferred until the related losses and gains on the hedged items are recognized if the derivative financial instruments are used as hedges and meet certain hedging criteria. Foreign exchange contracts and currency swap contracts that meet the criteria are accounted for under the allocation method. The allocation method requires that recognized foreign currency receivables or payables be translated using the corresponding foreign exchange contract rates. Since the hedging method and the target of each hedging transaction share the same conditions that apply at the start of the hedging activities and throughout subsequent periods, the Company's hedging approach enables exchange rate fluctuation to be offset completely. Hence, the Company considers its hedging method to be highly effective and omits an evaluation of the effectiveness of the hedging contracts. 14
The interest rate swaps which qualify for hedge accounting and meet specific matching criteria are not remeasured at market value, but the differential paid or received under the swap agreements is recognized and included in interest charges. In cases with matching specific criteria, the company omits an evaluation of the effectiveness of the hedging contracts. (p) Net Income Per Share Basic net income per share of common stock shown for each year in the accompanying consolidated statements of income is computed based upon the weighted average number of shares of common stock outstanding during the year. Diluted net income per share assumes the full exercise of potentially dilutive securities outstanding at the date of issuance. (q) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (r) Reclassifications Certain reclassifications have been made to the prior year s consolidated financial statements to conform with the presentation used for the year ended September 30, 2016. (3) New Accounting Pronouncements (a) Changes in accounting policies for Business Combinations The Company and its domestic subsidiary adopted Revised Accounting Standard for Business Combinations (ASBJ Statement No. 21, September 13, 2013 (hereinafter, Statement No. 21 )), Revised Accounting Standard for Consolidated Financial Statements (ASBJ Statement No. 22, September 13, 2013 (hereinafter, Statement No. 22 )) and Revised Accounting Standard for Business Divestitures (ASBJ Statement No. 7, September 13, 2013 (hereinafter, Statement No. 7 )) (together, the Business Combination Accounting Standards ) from the current fiscal year. As a result, the Company changed its accounting policies to recognize in capital surplus the differences arising from the changes in the Company s ownership interest of subsidiaries over which the Company continues to maintain control and to record acquisition related costs as expenses in the fiscal year in which the costs are incurred. In addition, the Company changed its accounting policy for the reallocation of acquisition costs due to the completion following provisional accounting to reflect such reallocation in the consolidated financial statements for the fiscal year in which the business combination took place. 15
The Company also changed the presentation of net income and the term non-controlling interests is used instead of minority interests. Certain amounts in the prior year comparative information were reclassified to conform to such changes in the current year presentation. With regard to the application of the Business Combination Accounting Standards, the Company followed the provisional treatments in article 58-2 (4) of Statement No. 21, article 44-5 (4) of Statement No. 22 and article 57-4 (4) of Statement No.7 with application from the beginning of the current fiscal year prospectively. In the consolidated statement of cash flows, cash flows from acquisition or disposal of shares of subsidiaries with no changes in the scope of consolidation are included in Cash flows from financing activities and cash flows from acquisition related costs for shares of subsidiaries with changes in the scope of consolidation or costs related to acquisition or disposal of shares of subsidiaries with no changes in the scope of consolidation are included in Cash flows from operating activities. This change has had no effect on the consolidated financial statements of the current fiscal year. (b) Change in accounting policies for depreciation method due to Tax Reform In association with the revision of the Corporation Tax Act, the Company has applied the Practical Solution on a change in depreciation method due to Tax Reform 2016 (ASBJ Practical Issues Task Force (PITF) No. 32, June 17, 2016) from the current fiscal year, and changed the depreciation method for facilities attached to buildings and structures that were acquired on or after April 1, 2016 from the declining-balance method to the straight-line method. This change has had no effect on the consolidated financial statements of the current fiscal year. (c) Accounting standards and guidance issued but not yet applied Revised Implementation Guidance on Recoverability of Deferred Tax Assets (ASBJ Guidance No. 26, March 28, 2016 (hereinafter, Guidance No. 26 ) (1) Overview Following the framework in Auditing Committee Report No. 66 Audit Treatment regarding the Judgment of Recoverability of Deferred Tax Assets, which prescribes estimation of deferred tax assets according to the classification of the entity by one of five types, the following treatments were changed as necessary: 1. Treatment for an entity that does not meet any of the criteria in types 1 to 5; 2. Criteria for types 2 and 3; 3. Treatment for deductible temporary differences which an entity classified as type 2 is unable to schedule; 4. Treatment for the period which an entity classified as type 3 is able to reasonably estimate with respect to future taxable income before consideration of taxable or deductible temporary differences that exist at the end of the current fiscal year; and 5. Treatment when an entity classified as type 4 also meets the criteria for types 2 or 3. 16
(2) Effective date Effective from the beginning of the fiscal year ending September 30, 2017. (3) Effects of application of the Guidance The Company and its domestic subsidiary are currently in the process of determining the effects of these new standards on the consolidated financial statements. (4) Inventories Inventories at were as follows: Millions of yen Thousands of U.S. dollars 2016 2015 2016 Finished goods 1,212 1,748 $ 11,990 Work in process 2,649 2,278 26,204 Raw materials 1,980 2,279 19,585 Supplies 50 45 500 5,893 6,352 $ 58,281 (5) Long-term Debt Long-term debt at was as follows: Millions of yen Thousands of U.S. dollars 2016 2015 2016 Current portion of long-term debt 987 1,724 $ 9,769 Long-term debt, principally from banks and insurance companies with interest rates from 0.19% to 1.47% 2,810 1,802 27,792 Subtotal 3,798 3,526 37,562 Less elimination of intercompany transactions (908) - $ (8,979) 2,890 3,526 $ 28,583 The amounts and maturities of long-term debt at September 30, 2016 were as follows: Millions of yen Thousands of U.S. dollars 2016 2016 2017 987 $ 9,769 2018 272 2,697 2019 451 4,465 2020 141 1,399 2021 126 1,251 2022 and thereafter 909 8,998 2,890 $ 28,583 17
(6) Retirement and Severance Benefits The Company has a lump-sum severance plan and multiple-employer pension plan as a defined benefit pension plan. Also, a defined contribution pension plan is also established for the employees. Its domestic subsidiary has a lumpsum severance plan as a defined benefit pension plan. Some consolidated subsidiaries in Europe have defined benefit pension plans. In addition, some consolidated subsidiaries in Europe and America have defined contribution pension plans. The Company has joined in a multiple-employer pension plan, but the portion of the pension assets in it cannot be calculated rationally. Therefore, it is treated in the same way as a defined contribution pension plan. (a) Defined benefit plans i) Movement in retirement benefit obligations Millions of yen Thousands of U.S. dollars 2016 2015 2016 Balance at the beginning of the fiscal year 4,705 5,945 $ 46,531 Cumulative effect of changes in accounting policies - 93 - Restated balance 4,705 6,039 46,531 Service cost 138 147 1,367 Interest cost 54 83 542 Actuarial loss (gain) 267 90 2,644 Benefit paid (191) (247) (1,889) Decrease resulting from exclusion of subsidiary from consolidation - (1,328) - Other (553) (78) (5,474) Balance at the end of the fiscal year 4,421 4,705 $ 43,721 ii) Movement in plan assets Millions of yen Thousands of U.S. dollars 2016 2015 2016 Balance at the beginning of the fiscal year 393 406 $ 3,886 Expected return on plan assets 8 9 79 Actuarial loss (gain) 64 (0) 639 Contribution paid by the employer 11 17 110 Benefit paid (13) (28) (135) Other (67) (11) (663) Balance at the end of the fiscal year 396 393 $ 3,917 18
iii) Reconciliation from retirement benefit obligations and plan assets to liabilities (assets) for retirement benefits Millions of yen Thousands of U.S. dollars 2016 2015 2016 Funded retirement benefit obligations 420 467 $ 4,154 Plan assets (396) (393) (3,917) 24 74 237 Unfunded retirement benefit obligations 4,001 4,237 39,567 Total net liability (asset) for retirement benefits at the end of the fiscal year 4,025 4,312 39,804 Liability for retirement benefits 4,025 4,312 39,804 Asset for retirement benefits - - - Total net liability (asset) for retirement benefits at the end of the fiscal year 4,025 4,312 $ 39,804 (*1) Of the liability for retirement benefits, the benefits due in the next fiscal year in the amount of 96 million ($954 thousand) in 2016 and 89 million in 2015 are included in other current liability. iv) Retirement benefit costs Millions of yen Thousands of U.S. dollars 2016 2015 2016 Service cost 138 147 $ 1,367 Interest cost 54 83 542 Expected return on plan assets (8) (9) (79) Net actuarial loss amortization 48 86 476 Past service costs amortization 2 2 23 Total retirement benefit costs for the fiscal year 235 309 $ 2,330 v) Remeasurements of defined benefit plans (before tax) Millions of yen Thousands of U.S. dollars 2016 2015 2016 Past service costs 2 2 $ 23 Actuarial gains and losses (4) 595 (44) Total remeasurements of defined benefit plans (2) 598 $ (20) 19
vi) Accumulated other comprehensive income comprises Millions of yen Thousands of U.S. dollars 2016 2015 2016 Past service costs (9) (11) $ (94) Actuarial gains and losses for the year ending September 30, 2016 (817) (812) (8,080) Total balance (826) (824) $ (8,174) vii) Plan assets 1. Plan assets comprise 2016 2015 Jointly invested assets 93 % 94% Others 7 % 6% Total 100 % 100% 2. Long-term expected rate of return Current and target asset allocations, historical and expected return on various categories of plan assets have been considered in determining the long-term expected rate of return. viii) Actuarial assumptions The principal actuarial assumptions at were as follows: 2016 2015 Discount rate 0.6% ~ 1.8% 0.6% ~ 2.3% Long-term expected rate of return 1.1% ~ 1.8% 2.0% ~ 2.2% Salary increase rate 1.6% ~ 5.0% 2.0% ~ 5.0% (b) Defined contribution plans The amounts of required contributions to the plans from the Company and its consolidated subsidiaries for fiscal years 2016 and 2015 were 282 million ($2,789 thousand) and 291 million, respectively. (c) Multiple-employer pension plan The amounts of required contributions to the multiple-employer pension plan for which the accounting treatment is the same as defined contribution plans were 91 million ($904 thousand) and 121 million for fiscal years 2016 and 2015. 20
i) Funded status in the whole multiple-employer pension plan as of March 31, 2016 and 2015 Millions of yen Thousands of U.S. dollars 2016 2015 2016 Pension Assets 77,014 83,744 $ 761,609 Net total actuarial obligation under pension funding programs and minimum actuarial reserve (96,894) (104,880) (958,208) Balance (19,880) (21,136) $ (196,598) ii) Percentages of contribution the Company made in the whole multiple-employer plan were as follows: As of March 31, 2016 2.92% As of March 31, 2015 2.96% iii) Supplemental explanation Main factor in the balance mentioned above (1) is prior service obligation of 22,440 million ($221,914 thousand) for FY2016 and 22,875 million for FY2015. The amortization method for this prior service obligation is equal installments of interest and principal for 20 years. (7) Income Taxes The Company and its domestic subsidiary are subject to several taxes based on earnings which, in the aggregate, resulted in an average statutory tax rate of approximately 33.1% and 35.6% for the years ended September 30, 2016 and 2015 respectively. The effective tax rate for the years ended differed from the statutory tax rate for the following reasons: *1 2016 2015 Statutory tax rate: - % 35.6 % Non-deductible expenses (for tax purposes) - 1.1 Per capita taxes - 0.5 Tax rate differential of foreign subsidiaries - (2.1) Change in valuation allowance allocated to income tax expenses - (14.5) Effect of changes in corporate tax rates - 1.2 Change on share transfer of a subsidiary - (6.3) Other - (0.3) Effective tax rate: - % 15.3 % (*1) The reconciliation for the year ended September 30, 2016 is omitted as the difference between the statutory tax rate and the effective tax rate was less than or equal to 5% of the statutory tax rate. 21
The significant components of deferred tax assets and liabilities at were as follows: Deferred tax assets: Millions of yen Thousands of U.S. dollars 2016 2015 2016 Net operating loss carryforward 2,026 2,436 $ 20,045 Retirement and severance benefits 801 776 7,930 Inventories 114 125 1,128 Accrued bonuses 126 130 1,247 Unrealized profit 214 210 2,116 Foreign tax credit 301 265 2,985 Other 763 927 7,549 Gross deferred tax assets 4,348 4,871 43,003 Valuation allowance (2,690) (2,953) (26,602) Total deferred tax assets 1,658 1,917 $ 16,401 Deferred tax liabilities: Accumulated depreciation (331) (506) $ (3,273) Percentage-of-completion method (228) (249) (2,263) Other (125) (200) (1,244) Total deferred tax liabilities (685) (956) $ (6,781) Net deferred tax assets 972 961 $ 9,619 Total deferred tax assets and liabilities shown above include both current and noncurrent elements. On March 29, 2016, amendments to the Japanese tax regulations, Act for Partial Revision of the Income Tax Act etc., (Act No. 15 of 2016) and Act for Partial Revision etc., of the Local Tax Act etc., (Act No. 13 of 2016) were enacted in the Diet. Based on the amendments, the statutory income tax rates utilized for the measurement of deferred tax assets and liabilities expected to be settled or realized from October 1, 2016 to September 30, 2018 and on or after October 1, 2018 were changed from 32.3% to 30.9% and 30.6%, respectively, as of September 30, 2016. Due to these changes in statutory income tax rates, net deferred tax assets (after deducting deferred tax liabilities) decreased by 16 million ($158 thousand) as of September 30, 2016 and deferred income tax expense recognized for the fiscal year ended September 30, 2016 increased by 16 million ($162thousand). 22
(8) Net Assets Under the Company Law of Japan ( the Law ), the entire amount paid for new share issues is required to be designated as common stock. However, a company may, by resolution of the Board of Directors, designate an amount not exceeding one half of the price of the new shares as additional paid-in capital, which is included in capital surplus. Under the Law, in cases in which a dividend distribution of a surplus is made, the lesser of an amount equal to 10% of the dividend or the excess, if any, of 25% of common stock over the total of additional paid-in capital and legal earnings reserve must be set aside as additional paid-in-capital or legal earnings reserve. Under the Law, appropriations of legal earnings reserve and additional paid-in capital for the elimination or reduction of a deficit generally require a resolution approved at the shareholders meeting. Additional paid-in capital and legal earnings reserve may not be distributed as dividends. Under the Law, the entire amount of additional paid-in capital and legal earnings reserve may be transferred to other capital surplus and retained earnings, respectively, which are potentially available for the payment of dividends. The maximum amount that the Company can distribute as dividends is based on the nonconsolidated financial statements of the Company in accordance with the Law. The annual general shareholders meeting held on December 20, 2016 resolved that cash dividends in the amount of 418 million ($4,139 thousand) be approved for the year ended September 30, 2016. The dividends have not been accrued in the consolidated financial statements as of and for the year ended September 30, 2016 and will only be recognized in the period in which they were approved. A summary of dividends paid during the fiscal year is as follows: Resolution Type of shares Dividend amount (millions of yen) Dividends per share (yen) Effective date Annual general shareholders meeting dated December 22, 2015 Common stock 313 7.50 December 24, 2015 Board of Directors meeting dated May 11, 2016 Common stock 313 7.50 June 15, 2016 (9) Research and Development Costs Research and development costs are charged against income when incurred and included in selling, general and administrative expenses. Research and development costs for the years ended were 739 million ($7,311 thousand) and 892 million, respectively. 23
(10) Impairment Loss on Fixed Assets The Company has recognized impairment loss on the fixed assets for the year ended September 30, 2015 as follows: Location Description Classification Millions of yen Matsudo-city, Chiba, Japan Company Dormitory Land 186 Building 73 The Company grouped its fixed assets based on business units, The fixed assets have been written down to the recoverable amounts due to the Company's decision that the company dormitory should be sold. The recoverable amounts are net realizable values supported by a real-estate appraisal report. Except assets used for rent and assets scheduled for disposal, which were individually considered. (11) Securities and Investments in Securities Securities included in securities and investments in securities at were as follows: Book value Millions of yen (2016) Acquisition cost Unrealized gain (loss), net Securities 886 977 (90) Book value Millions of yen (2015) Acquisition cost Unrealized gain (loss), net Securities 1,152 909 243 Book value Thousands of U.S. dollars (2016) Acquisition cost Unrealized gain (loss), net Securities $ 8,770 $ 9,668 $ (897) 24
(12) Financial Instruments Qualitative information on financial instruments (a) Policy for financial instruments The Company invests temporary surplus cash in safe financial instruments which carry little risk such as bank deposits and raises short-term funds necessary for its operations through bank loans. In addition, the Company has policies to utilize derivatives only for hedging purposes and does not conduct any speculative transactions. (b) Financial instruments and related risks Trade receivables such as accounts receivable and notes receivable are exposed to credit risk in relation to customers and trading partners. Securities and investment securities are held mainly to maintain business relationships and are exposed to the risk of market price fluctuation. Trade payables such as accounts payable and notes payable are due within one year. Loans are used for both short-term funds raising related to business operations and capital investment activities. Some of the loans have variable interest rates and are exposed to the risk of interest rate fluctuation. The Company s derivative transactions are limited to exchange contracts which hedge the risk of fluctuations in the exchange rates of the foreign currencies in which some operating credits, which hedge the risk of fluctuations in the exchange rates of the currency swap in which some debts and liabilities are denominated, and hedge the risk of fluctuation in the interest rates of long-term debt. Accounting policies for these hedging contracts are described in Note 2 Significant Accounting Policies (o) Derivatives and Hedging Activities. (c) Risk management for financial instruments i) Credit risk (risk of economic loss arising from counterparty s failure) In accordance with credit management policies, the Company monitors the collection and balance of accounts receivable and notes receivable for each counterparty to recognize early and minimize the uncertainty of collection arising from any degradation of the counterparty s financial status. In respect to derivatives used to hedge credit risk, the Company enters into contracts only with highly rated financial institutions. 25
ii) Market risk (risk of foreign exchange and interest rate fluctuation) As a general rule, the Company uses exchange contracts to hedge the risk of fluctuation of foreign exchange rates and the risk of interest rate fluctuation. The accounting department conducts and manages the derivative transactions in accordance with the control procedures approved by the Board of Directors. The issuance of bonds, large debt and so on has to be approved by the Board of Directors. Although some long-term loans are exposed to market risk from changes in variable interest rates, the Company mitigates such risk from longterm debt by using interest rate swaps. iii) Liquidity risk (risk of inability to pay on time) The accounting and financial department manages liquidity risk by making periodic cash management plans. (d) Notes to fair values of financial instruments The fair values of financial instruments include market base values and values reasonably calculated for some financial instruments when market prices are not available. As the calculations include a number of factors, some of which are variable, the values are subject to change depending on the assumptions adopted. Fair values of financial instruments The book value and fair value of the financial instruments on the consolidated balance sheets as of September 30, 2016 and 2015 are stated in the following tables. The tables do not include financial instruments for which the fair value was not available (See Note 2 below). Millions of yen (2016) Carrying amount Fair value Difference (1) Cash and time deposits 12,642 12,642 - (2) Trade receivables 10,595 10,595 - (3) Securities - - - (4) Short-term loan receivables 12 12 - (5) Investment in securities 886 886 - Total assets 24,137 24,137 - (1) Trade payables 4,202 4,202 - (2) Long-term debt (*1) 2,890 2,903 12 Total liabilities 7,092 7,105 12 Derivatives (*2) (118) (118) - 26
Millions of yen (2015) Carrying amount Fair value Difference (1) Cash and time deposits 10,017 10,017 - (2) Trade receivables 11,652 11,652 - (3) Securities 119 119 - (4) Short-term loan receivables 887 887 - (5) Investments in securities 1,033 1,033 - Total assets 23,711 23,711 - (1) Trade payables 4,974 4,974 - (2) Long-term debt (*1) 3,526 3,536 9 Total liabilities 8,500 8,510 9 Derivatives (*2) (42) (42) - Thousands of U.S. dollars (2016) Carrying amount Fair value Difference (1) Cash and time deposits $ 125,027 $ 125,027 $ - (2) Trade receivables 104,779 104,779 - (3) Securities - - - (4) Short-term loan receivables 119 119 - (5) Investment in securities 8,770 8,770 - Total assets $ 238,697 $ 238,697 $ - (1) Trade payables $ 41,558 $ 41,558 $ - (2) Long-term debt (*1) 28,583 28,709 126 Total liabilities $ 70,141 $ 70,267 $ 126 Derivatives (*2) $ (1,173) $ (1,173) $ - (*1) Long-term debt due within one year is included in long-term debt. (*2) Amounts for derivatives are net amounts of assets and liabilities. Negative amounts stated with parenthesis represent a net liability position of the derivative financial instruments. Note 1: The method of computing market value of financial instruments and securities and derivative transactions Assets (1) Cash and time deposits, (2) Trade receivables and (4) Short-term loan receivables The book values are listed in this table because the book values of these assets approximate the fair value as they are settled in a short period of time. (3) Securities The fair value is based on the quotes provided by financial institutions. (5) Investments in securities The fair value of equity instruments and debt instruments is measured at the market price quoted on the stock exchange. 27
Liabilities (1) Trade payables The book values are listed in this table because the book value of trade payables and short-term debt approximate the fair value because of their short maturities. (2) Long-term debt The fair value is calculated by discounting back to the present value, assuming the interest rate is the same as that for a new loan equivalent to the current one in principle, interest rate and the other conditions. Derivatives Refer to Note 13, Derivatives Transactions. Note 2: Financial instruments for which the fair value is not available. Book value Millions of yen (2016) Book value Thousands of U.S. dollars(2016) Non-listed stock 207 $ 2,048 Book value Millions of yen (2015) Non-listed stock 154 These financial instruments are not included in (5) Investment in securities since there is no market value available for these instruments. Note 3: Scheduled redemption amounts for financial assets and securities with maturities subsequent to September 30, 2016 and 2015. Within 1 year Millions of yen (2016) 1 through 5 years 5 through 10 years Over 10 years Cash and time deposits 12,642 - - - Trade receivables 10,595 - - - Short-term loan receivables 12 - - - Securities and investments in securities Other securities with maturities - - - - Total 23,250 - - - Within 1 year 28 Millions of yen (2015) 1 through 5 years 5 through 10 years Over 10 years Cash and time deposits 10,017 - - - Trade receivables 11,652 - - - Short-term loan receivables 887 - - - Securities and investments in securities Other securities with maturities 119 - - - Total 22,677 - - -
Within 1 year Thousands of U.S. dollars (2016) 1 through 5 years 5 through 10 years Over 10 years Cash and time deposits $ 125,027 $ - $ - $ - Trade receivables 104,779 - - - Short-term loan receivables 119 - - - Securities and investments in securities Other securities with maturities - - - - Total $ 229,926 $ - $ - $ - Note 4: Scheduled repayment amounts for long-term debt subsequent to. 1 year 1 through 2 years Millions of yen (2016) 2 through 3 years 3 through 4 years 4 through 5 years Over 5 years Long-term debt 987 272 451 141 126 909 1 year 1 through 2 years Millions of yen (2015) 2 through 3 years 3 through 4 years 4 through 5 years Over 5 years Long-term debt 1,724 948 227 385 50 189 1 year 1 through 2 years Thousands of U.S. dollars (2016) 2 through 3 years 3 through 4 years 4 through 5 years Over 5 years Long-term debt $ 9,769 $ 2,697 $ 4,465 $ 1,399 $ 1,251 $ 8,998 29